Will AS Tallinna Vesi (TAL:TVEAT) Multiply In Value Going Forward?

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think AS Tallinna Vesi (TAL:TVEAT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for AS Tallinna Vesi:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.09 = €22m ÷ (€256m - €14m) (Based on the trailing twelve months to December 2020).

Thus, AS Tallinna Vesi has an ROCE of 9.0%. On its own that's a low return, but compared to the average of 5.3% generated by the Water Utilities industry, it's much better.

See our latest analysis for AS Tallinna Vesi

Above you can see how the current ROCE for AS Tallinna Vesi compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for AS Tallinna Vesi.

What Does the ROCE Trend For AS Tallinna Vesi Tell Us?

In terms of AS Tallinna Vesi's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 13%, but since then they've fallen to 9.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From AS Tallinna Vesi's ROCE

We're a bit apprehensive about AS Tallinna Vesi because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 34% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

AS Tallinna Vesi does have some risks though, and we've spotted 2 warning signs for AS Tallinna Vesi that you might be interested in.

While AS Tallinna Vesi isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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